Share This Story!

Bartiromo: Debate rages on Wall Street about 2nd half

The July 4th holiday represents the half way mark for the year on Wall Street and never has the debate about growth and markets been hotter than this year. That is because the economy contracted 2.9% in the

Bartiromo: Debate rages on Wall Street about 2nd half

Maria Bartiromo, whose monthly column One on One has long provided USA TODAY readers with insightful interviews with high-profile business leaders, now also will share the buzz she is hearing out of Wall Street. In her new role as anchor and global markets editor at Fox Business Network, Bartiromo is in constant contact with some of the financial world's brightest minds. Each month, she now will share what's hot — and what's not — on Wall Street. This is her inaugural effort.

The July 4th holiday represents the halfway mark for the year on Wall Street, and never has the debate about growth and markets been hotter than this year. The economy contracted 2.9% in the first quarter, and the debate is raging on where growth comes from in the second half of the year.

The numbers even shocked James Bullard, president of the St. Louis Federal Reserve. "This report is giving me heartburn, but I'm certain it's not telling the real story," Bullard told me the week of the release on The Opening Bell on Fox Business Network.

It's an important story, because the stock market has been trading at record highs on the expectation of growth in the economy and for corporate earnings. "Growth is going to be critical for this market in the second half," says Russ Koesterich, chief investment strategist at BlackRock, the largest asset manager in the world, with more than $4 trillion under management. "I am not worried. Things will snap back from the winter-related decline."

To be sure, the weather was a big issue in the first quarter. The brutal snow, rain and cold kept consumers at home and out of stores. But even with the weather-related issues, a 2.9% contraction was much worse than expected and now has others worried that things are a lot worse than we previously thought. "How do you go from a 2.9% decline to 3% growth in a couple of quarters? I do not see it happening," says Stephanie Pomboy, founder of MacroMavens, an economic consulting firm.

The stock market is based on growth and earnings, so if we were to see continued contraction, it would almost definitely hit corporate earnings, and that would take the market down from its current record levels.

Stocks have been hitting all-time highs for a few reasons. Corporate earnings have been strong, and companies are sitting on more than $2 trillion in cash. The stocks of those companies have benefited greatly from a better balance sheet. With the Federal Reserve keeping interest rates near record low levels, there are very few alternatives to owning stocks if you're looking for any kind of yield. Money keeps flowing into companies that are growing, and that pay dividends.

But any change to the strong earnings picture could derail that, which is why the GDP contraction has Wall Street buzzing, and every economic data point is scrutinized. "I'm not buying that GDP number at all," says Drew Matus, senior U.S. economist at UBS, which is why he continues to bet stocks will do well in the second half of the year. "If you look at any other economic numbers — jobless claims, consumer confidence, manufacturing — all of the data look much better than that GDP. It was temporary and will snap back."

Matus says the most important economic data point to focus on now is the number of new jobs created every month. We have been averaging about 200,000 for several months. He believes this will continue and will ultimately prove the GDP contraction to be wrong. "How is it possible that this economy is not growing, when, in fact, we've created half a million jobs just in the last few months?" (Wall Street gets a fresh look at the jobs situation Thursday morning, when the government releases the June employment numbers.)

Most people believe the first-quarter numbers were distorted, not only by the weather, but also by a downward revision in health care spending and high inventories. The one segment that still appears to be lagging is the biggest: household consumption, which represents two thirds of economic activity. Personal spending has been coming in below expectations, and that has put pressure on consumer stocks.

There are many potential catalysts for stocks in the second half of the year. There's the end of the Fed's stimulus, expected in October. And there are the midterm elections, which could unleash new money into the economy from institutions that have been sitting on cash because of government policies.

But the second-half performance primarily hinges on growth — where will it come from and if it is sustainable. Until we see some consistency in terms of positive economic data, expect this market to be cautious. That's why the next GDP report, out in a few weeks, will be closely watched for any confirmation of a snapback in the economy and safety in stocks.

Maria Bartiromo is anchor and global markets editor at Fox Business Network. Her morning show, The Opening Bell, can be seen on FBN weekdays 9-11 a.m. ET. Her Sunday Morning Futures program airs live on Sundays at 10 a.m. ET on Fox News Channel. Talk to her on Twitter @mariabartiromo